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The ethics of shareholder value: duty, rights and football
Donald Nordberg
Westminster Business School
Westminster Business School, University of Westminster
Working Paper Series in Business and Management Working Paper 11-3 June 2011
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WORKING PAPER SERIES IN BUSINESS AND MANAGEMENT
WORKING PAPER 11-3 June 2011
The ethics of shareholder value: Duty, rights and football
Donald Nordberg University of Westminster
Correspondence Donald Nordberg ([email protected]) Westminster Business School University of Westminster 35 Marylebone Road London NW1 5LS, UK
ISBN ONLINE 978-1-908440-02-0
WESTMINSTER WORKING PAPER SERIES IN BUSINESS AND MANAGEMENT, PAPER 11-3
The ethics of shareholder value: Duty, rights & football
Donald Nordberg Westminster Business School, University of Westminster
Abstract
How does a board of directors decide what is right? The contest over this question is
frequently framed as a debate between shareholder value and stakeholder rights,
between a utilitarian view of the ethics of corporate governance and a deontological
one. This paper uses a case study with special circumstances that allow us to
examine the conflict between shareholder value and other bases on which a board
can act. In the autumn of 2010 the board of Liverpool Football Club sold the company
to another investing group against the wishes of the owners. The analysis suggests
the board saw more than one type of utility on which to base its decision and that one
version resonated with perceived duties to stakeholders. This alignment of outcomes
of strategic value with duties contrasted with the utility of shareholder value. While
there are reasons to be cautious in generalizing, the case further suggests reasons
why boards may reject shareholder value in opposition to mainstream notions of
corporate governance, without rejecting utility as a base of their decisions.
Keywords: Corporate governance, Boards, Ethics, Pragmatism, Shareholder value, Liverpool FC.
Introduction
In 2010 a strange event occurred in a corner of the world of corporate governance:
The board of directors of a sizeable enterprise in the UK fired the owners. The event
attracted wide coverage in the news media, providing a rare public glimpse into
The ethics of shareholder value 1 WESTMINSTER WORKING PAPER SERIES IN BUSINESS AND MANAGEMENT, PAPER 11-3
corporate governance operating in the raw. What the incident revealed made
intriguing reading for sports fans around the world, throwing up a cast of characters
with heroes and villains, a real-life boardroom soap opera, the modern-day
equivalent of a morality play. But the lessons we can draw from it, about the ethics of
corporate governance and the role of company directors are larger and more
nuanced. Liverpool Football Club got new owners and hope for salvation from a
forced descent from the English Premier League.
Away from the hype of the headlines, a more mundane set of concerns arise: The
incident suggests that directors do not, in practice, or at least in this case, put their
allegiance to shareholders above all. The case raises questions about the nature of
shareholder value, which lies at the heart of much of the academic literature and
public-policy debate over corporate governance around the world during the past
several decades. It offers a rare chance to analyze a key issue, how in practice
directors see their governance role, in quite a pure form, through a case that strips
away much of the messy complexity of public corporations and various categories of
institutional investors and focuses attention instead on the relationship between
boards and owners. At work in this case is a different logic, a different ethic, from the
one prescribed in much of the literature on corporate governance, one with
implications for how business people use ethics to inform their judgements.
This essay considers first the background of the case and the corporate governance
issues it raises and then reviews what the literature tells us about the role of boards
and owners. It considers how longstanding debates in ethics give shape to the work
of boards of directors, independently of law and regulation, and how in particular
utilitarian approaches to board ethics have clashed with duty-based perspectives.
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The evaluation of the case suggests that in practice the board of this company chose
what it felt was the "right thing to do" once the duty and utility became aligned in
purpose, a purpose that remained at variance with notions of shareholder value that
lie at the heart of many normative views of corporate governance. It concludes with
observations about the limitations of generalizing from this case to the wider world of
corporations, but also with reasons why this pure case resembles closely the model
of corporate governance that the mainstream literature describes.
Ownership of Liverpool FC
As it entered the 2010-11 season Liverpool FC had won 18 championships in the top
English football league – tied with its arch rival Manchester United for the lead – but
none in the last 20 years despite regularly finishing in the top four and competing in
the top European club competition. The case was widely chronicled in the UK press
and in statements from the club itself (e.g. Eaton, 2010a, 2010b; Gibson, 2010;
Liverpool FC, 2010; R. Smith, 2010; S. Smith, 2010). In February 2007, the club
came under the ownership of two American investors, Tom Hicks and George Gillett,
in a deal that valued the club at £219 million. Hicks, a venture capitalist, had
experience of sports franchises; Gillett owned the Montreal Canadiens hockey team.
Together they promised to revive Liverpool FC with investment in a new stadium and
in players to secure its place at the very top of English football. The financing method
they adopted was similar to their experience in managing other sports franchises:
borrow money on the promise of future revenue streams and maximize the yield to
shareholders by keeping equity investment to a minimum. Royal Bank of Scotland
made the loans to finance the deal.
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The two owners soon fell out with each other, leaving the club without direction or the
planned further investment, just as the global financial crisis swept RBS into its
maelstrom. Performance on the pitch was good but not great, and the club found it
difficult to compete for new talent against rivals like Chelsea, Real Madrid and latterly
Manchester City, with seemingly unlimited funds available from wealthy owners who
cared little if not at all about the cost. By the autumn of 2010, with the loans coming
due for repayment and RBS unwilling, perhaps even unable to extend the term, the
club teetered on the brink of slipping into administration, a form of bankruptcy. The
board tried to negotiate the sale of the club to a series of other investors, without
success. The turmoil unsettled the team. Seven games into the new season,
Liverpool sank to near the bottom of the Premier League, having won only one match
and gained only six points. Under league rules, Liverpool FC would have nine points
deducted if it went into administration. That would give it a total for the season to-
date of minus three, making the threat of relegation next season to the second tier of
teams palpable. If that happened, the club would lose tens of millions of pounds in
television revenues; key players seemed certain to leave even before that. This path
would clearly be bad for the club, bad for the supporters, and probably bad for
football. Fans assailed the owners for their actions and inactions, for betraying the
proud traditions of the club – their club, the fans' club.
The board felt urgent action was needed. After various suitors pulled out of proposed
deals, the board was left with a decision: the most viable alternative to administration
was to sell the club to another American sports investor, John Henry, through his
company, New England Sports Ventures. But there was a catch: Henry's offer, worth
about £300 million, was sufficient only to pay off the debt and accrued interest on the
The ethics of shareholder value 4 WESTMINSTER WORKING PAPER SERIES IN BUSINESS AND MANAGEMENT, PAPER 11-3
loans to RBS. Hicks and Gillett would receive next to nothing. By a vote of 3-2 the
board approved the sale of the club to Henry. The dissenting votes were from Hicks
and Gillett.
Hicks and Gillett then sought to have two board members removed and replaced with
their own associates. The chairman Martin Broughton, who was also chairman of a
major listed company, argued that he had joined the Liverpool FC board on explicit
written agreement that he should try to find a buyer. Christian Purslow, managing
director, joined the board to put the club's finances in order. Moreover, Broughton
insisted that he and only he could remove members of the board. Hicks and Gillett
took their case to court. They lost in a ruling by the High Court in London, which ruled
that the board did have the right to sell the club. They then sought and gained an
injunction to block the sale from a court in Dallas, Texas, with somewhat tenuous
jurisdictional grounds, before losing again in London before the Dallas court backed
down. The deal was forced through over the continuing objection of the owners.
Henry took control of the club, though Hicks and Gillett immediately threatened to
sue the other three directors personally for breach of trust. Still, the fans won, and
arguably football won. Hicks and Gillett had lost.
The courts no doubt considered the finer points in property rights and contract law in
reaching their conclusions, and what company law says about the obligations of
directors. The board no doubt took legal advice before voting to disenfranchise the
owners, for the sake of minimizing the danger that another court might find the
directors in wilful disregard of the law. But law is only an approximation of ethics, the
attempt by society to settle what is right with a degree of fairness to all. The decision
to go against the express wishes of the owners they were meant to serve raises
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issues of ethics that underpin, often in an unspoken way, the field of corporate
governance.
Corporate governance, in theory and practice
Much of the literature on corporate governance has taken the view that the purpose
of boards is to ensure the company strives to achieve shareholder value. Under
agency theory, managers, the "agents", are assumed to act in their own interest,
which may diverge substantially from those of shareholders, the "principals"
(Eisenhardt, 1989; Fama, 1980; Fama & Jensen, 1983). This theoretical approach
views the board of directors as the shareholders' intermediary. Shareholders elect
boards to monitor the performance of managers at closer hand than shareholders
could do on their own. In this view, boards may represent another level of agency
relationship to their principals, but one, if properly structured, less likely to show
conflicts of interest with the principals and thus help to overcome the agency problem
(Jensen & Meckling, 1976). The ethical assumption is this: Agents should act in
accordance with the interests of owners, so the corporate governance imperative is
to align the utility of boards and owners. In practice boards' primary roles are 1) to
structure pay for managers that align their interests with those of shareholders and
then 2) to monitor performance against targets. Discussions of the agency problem
are often couched in terms of behavioural economics: They assume that "economic
man", as a non-ethical actor, will respond to incentives in a self-interested way. This
line of theory led to the growth of pay-for-performance and stock options in public
companies. While they represent an "agency cost" to shareholders, that cost is worth
incurring if performance enhances shareholder value even more. With growing
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theoretical justification (e.g. Rappaport, 1986), striving for shareholder value became
the main goal of enterprises and the defining purpose of boards.
Agency theory may dominate the literature on corporate governance, but it has its
critics who voice alternative interpretations of the role of boards. Proponents of
stakeholder theory (e.g. Donaldson & Preston, 1995; Freeman & Philips, 2002) see
boards as having duties that go beyond satisfying shareholders, reaching to all those
who have a legitimate interest in the enterprise, including suppliers, customers,
employees and others. In this view, the duty of directors is to assess the salience of
stakeholder interests (Suchman, 1995). Stakeholder theory can be seen as taking
two forms. In a weak form, boards should promote those stakeholder claims that also
contribute to the value of the enterprise, what Jensen (2001) calls enlightened value
maximization. A strong form of stakeholder theory, however, ascribes rights to
stakeholders, placing their interests on a par or even ahead of shareholder interests
(e.g. Crowther & Caliyurt, 2004). Freeman, whose early invocation of the term
stakeholder (1984) launched this stream of discussion, has since sought to reconcile
what he called the instrumental and normative forms of stakeholder theory (Freeman
& Philips, 2002).
Other doubts about the adequacy of agency theory have emerged as well.
Challenges come from the idea that directors have greater duties that monitoring
managers and controlling their behaviour. Empirical studies suggest that boards have
input to the strategy of enterprises (McNulty & Pettigrew, 1999; Pugliese, et al., 2009;
Pye & Pettigrew, 2006), even if their contribution is modest (Stiles, 2001). Directors
also facilitate access to scarce external resources (Hillman, Cannella, & Paetzold,
2000). These contributions sit uncomfortably in corporate governance models where
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the board's role is performance monitoring and control (Roberts, McNulty, & Stiles,
2005). Blair and Stout (1999) argue that boards serve as a mediating hierarchy to
resolve the contesting claims on a company's resources. Still others see in the
behaviour of directors and senior corporate officers a commitment to doing a good
job, an area known as stewardship theory (Davis, Schoorman, & Donaldson, 1997;
Muth & Donaldson, 1998). Its conclusions share with agency theory a focus on value
creation, often for shareholders, but like resource-dependency approaches they
reach conclusions about the "right thing to do" that are at odds with an agency-based
approach.
Most of the corporate governance literature focuses on relationships on larger listed
companies, with a large number of dispersed shareholders, where the agency
problem is seen as most acute. A second stream of the literature concerns large
owners who abuse their comparative power and expropriate corporate resources for
their own purposes at an agency cost to minority shareholders, a stream of argument
often focused on continental European companies, so many of which have
controlling "blockholders" (Enriques & Volpin, 2007; Laeven & Levine, 2008; Roe,
2003). Another stream looks at governance in private companies (e.g.
Bartholomeusz & Tanewski, 2006; Ng & Roberts, 2007), but that often focuses on
issues of succession planning in family businesses, rather than shareholder value
(Hillier & McColgan, 2009; Scholes, Wright, Westhead, & Bruining, 2010). That
literature, however, raises issues that go to the heart of this case, and by reflection
those of large listed companies as well: What happens when shareholders interests
are out of line with the interests of the business itself? The competing theories of
corporate governance raise questions about the ethical basis that directors take
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when deciding between competing claims. We turn now to a discussion of the ethical
principles that underlie these contesting approaches to corporate governance.
Ethics in corporate governance
A substantial literature sees corporate governance as a practical example of ethics in
action (Brickley, Smith, & Zimmerman, 2003; Martynov, 2009; McCall, 2002; Roberts,
2005, 2009; Rodriguez-Dominguez, Gallego-Alvarez, & Garcia-Sanchez, 2009;
Wieland, 2001; Zetzsche, 2007). The starting point is often that the agreement to
create a corporation is a decision based on perceived utility for the participants, so
utilitarian ethics hold sway. Echoing Bentham (1789/1904) and Mill (1863/1991), this
approach sees the greater good for the greatest number of shareholders as its
central principle. Agency theory, sometimes seen as taking an amoral stance, can be
viewed as being based on ethical egoism (Frankena, 1963), moderated through the
moral force of the invisible hand of markets (Zak, 2008). This view has resonances in
company law and theories of the firm as a nexus of contracts with the aim of
minimizing transaction costs (Coase, 1937; Williamson, 1988).
This view sits unhappily with many scholars of ethics, as a shortcoming of
utilitarianism and other consequentialist approaches yield problematic responses to
many of the moral questions that businesses face. Much of stakeholder theory,
particularly of the strong variety, is built on deontological assumptions of a priori
duties of boards to consider the broader impact of corporate decisions (Bowie, 1999;
Evan & Freeman, 1993; Freeman & Evan, 1990), rather than just the fabled "bottom
line".
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Various scholars have attempt to bridge the divide between duty-based and
consequentialist approaches. Hasnas (1998) argues for a consent-based view of
corporate governance, as it represent the common ground between shareholder- and
stakeholder-based approaches as well as with a social contract theory of the firm.
This, too, is unsatisfactory as the basis for the difficult decisions, however, when the
interests of shareholders and stakeholders polarize sharply, which is when boards
need to turn to ethics for guidance, cases where both law and codes of conduct tend
to be silent. Hendry (2001, p. 173) argues that business ethics scholars have failed to
make the case for a realistic version of stakeholder theory that would provide a
practical alternative to the shareholder perspective, concluding that "despite all the
talk of stakeholders, they have become increasingly marginal to the corporate
governance debate".
The divide is apparent when setting out the ethical approach that underpins the main
theories of corporate governance. Nordberg (2008) makes the case that another
consequentialist approach is possible, changing the frame of reference away from
stakeholder versus shareholder notions of the firm. He proposes instead a concept
called "strategic value", in which directors may adopt a utility-based approach,
calculating as best one can the value of the outcomes of their decisions, though not
with shareholder value or even an instrumental notion of stakeholder theory as its
focal point. In this ethical frame, directors focus on the consequences of decisions to
the value of the business, irrespective of the outcome for any stance any group of
shareholders might take. This is not quite what the UK law identifies as the
responsibility of directors, as it puts greater emphasis on the descriptive first part – to
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"promote the success of the company" – than on the normative second part – "for the
benefit of its members as a whole".
Still, shareholder value is a problematic notion, despite the mathematical formulation
advanced by Rappaport (1986) with its calculation of a return on capital largely
divorced from the interests of the people who provide it, locating the decisions of
boards as rational, economic ones, while ignoring the bounded nature of the
rationality that leads to them (Simon, 1955). This approach to value calculation
stands accused by think-tanks (e.g. Aspen Institute, 2009; Tonello, 2006), policy-
makers (e.g. Walker, 2009) and academics (e.g. Bebchuk, 2005) of fostering a short-
term approach to business decisions. The metric of "total shareholder return", the
sum of dividends and capital gains, seems simple enough to calculate until one
recognizes shareholders lack a common time horizon for their interests, even if those
interests were common (Admati & Pfleiderer, 2009; Edmans & Manso, 2009;
Nordberg, 2010).
Another approach draws upon the philosophical tradition of pragmatism to reconcile
competing claims of duty and utility. Hendry (2004) argues the case for a bimoral
approach to move beyond the shareholder-stakeholder views with their utilitarian and
deontological underpinnings. Hendry draws the view from Rorty (1989) that behind
American pragmatism sits an optimistic view that people "will use their freedom not
only to advent their self-interest but also to protect the common interest" (Hendry,
2004, pp. 149-150). Here the moral choice involves living with and reconciling
tensions between obligations and self-interest. Singer (2010) shares the view that
shareholder and stakeholder orientations split along deontological and
consequentialist grounds with a utility-based view for more instrumental approaches
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to stakeholders in the middle. He sees in the American pragmatist tradition of James,
Dewey and Peirce a way to reconcile the dilemma and work through the dialectic of
contesting ethical norms. He notes that Margolis (1998) called for pragmatic solutions
when empirical ambiguities arise. Margolis and Walsh (2003) see ambiguity as the
starting point of many strategic decisions, pointing towards a pragmatic basis for
decision-making weighing the balance of contending ethical frames.
With this frame of reference in mind we return to the case of Liverpool FC as its
directors voted to ignore the expressed wishes of the owners and sold the club out
from under them. What was the ethical basis for their decision, and what implications
might it have more generally for the work of corporate boards?
Ethics at Liverpool FC
To those interested in corporate governance, this case presents a remarkably simple
example of the issues that arise between owners and boards. First, it is a private
company, required under law to report only summary annual financial statements to
the authorities and only many months in arrears. It faces no obligation for continuous
disclosure of material information. However, in keeping with the practice of several
large football clubs in the UK, many of which were once listed on public equity
markets, Liverpool FC has been more forthcoming with disclosures than the law
requires. Second, when the case began, and stripping away the formalities of the
corporate entities that acted as intermediaries, there were only two shareholding
individuals, so discussions of its corporate governance need not deal with the
complexity of how the board could discern where the interests of shareholders lie.
Third, both shareholders were members of the board of directors, with direct access
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to all the information relevant to the board's decision. Neither the separation of
ownership and control nor the information asymmetries that complicate analysis of
corporate governance concerns in public companies apply.
The board voted by 3 to 2 to sell the club to New England Sport Ventures. Despite
their disagreements over seemingly everything else to do with the club, Hicks and
Gillett were united in their view that selling the club was a bad idea. The agency
problem described by many scholars of corporate governance (Fama, 1980; Fama &
Jensen, 1983; Kumar & Sivaramakrishnan, 2008) took on a rather different light.
Viewing the board and senior management of the club as agents of the owners, the
agency problem swells to extreme proportions: not only has the board appropriated
resources of the owners, they have taken control of the company away from its
owners and given it to another party.
The proposed price, from New England Sports Ventures or the other would-be
suitors, was insufficient to give the owners much if any return on their investment.
The alternative – Hicks and Gillett remaining as owners while the club enter a court-
ordered administration – included the risk that key players would see to leave the
club at the next available time in January 2011. The consequences included possible
relegation next season, with lower revenues from television rights, but with the
possibility that the owners could still recover some value at some time in the future.
Whether that would be the case is a business judgement, and opinion on the board
might well have been divided. Even so, the interests of the shareholders were clear:
They had expressed them in no uncertain terms.
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The case raises legal questions concerning the boundaries of property rights and the
nature of the contracts under which the chairman and the managing director joined
the board. The board no doubt took legal advice before acting against the instruction
of the owners, but before that was needed they faced what was essentially a
question of ethics in corporate governance. Narrow self-interest, ethical egoism,
seemed not to play a role in the board's decision. A threat of litigation hung over the
case, and the board members who voted against the owners had little personally to
gain other than the peace and freedom of leaving the board with the job of selling it
done. They may have calculated, more or perhaps rather less formally, the utility of
the transaction, but clearly the owners' perception of utility was very different. And if
the board's fiduciary duty is to the owners, then a legal interpretation of utility would
have led the board to a different conclusion. This was not, then, a simple, utilitarian
view based on shareholder value.
A stakeholder analysis suggests a different interpretation of the rationale for the
board's decision. The chairman and managing director were both avowed supporters
of the club. Much of the interest among news organizations and reporting on the
club's website focused on fan reaction. New management would end the boardroom
feuding and let the players concentrate on on-the-pitch performance. Fewer players
would demand to have their contracts sold to other clubs in the next transfer period in
January. New owners would proceed with rebuilding the stadium to increase its
capacity and create improved amenities for fans. Most importantly, new owners
would give the club a fighting chance to revive its performance enough to escape
relegation, a humiliation that fans could scarcely contemplate. Moreover, as a sports
enterprise, Liverpool FC has commitments to its competitors. Unlike a normal
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business, the presence of competitors is fundamental to the product. Horizontal
growth by acquisition has no meaning. And the nature of competition-as-product
gives a requirement from greater regulatory intervention and an ethical obligation
towards other clubs. Football league rules are set to facilitate the failure of clubs,
though the demise or even just the demotion of one of the biggest clubs would cause
both financial and reputational damage to others. This alters the stakeholder map,
making competitor claims more salient (Agle, Mitchell, & Sonnenfeld, 1999) and
justifying a level of regulation that further constrains the action of managers and
owners and the discretion that boards have in choosing a course of action.
But was this an invocation of stakeholder rights over shareholder rights? Was this a
decision based on a sense of duty to a larger purpose? As the case reached its
conclusion, Broughton spoke of his allegiance to the fans and the club's "wonderful
history, a wonderful tradition", adding:
"I said 'keep the faith'. I had the faith. I was quite clear in my mind that we
were doing the right thing, and I was quite clear that justice was on our
side and that we would work our way through it…. I want to thank the fans
as well. This has been as stressful for them as it has been for us. I fully
sympathise with their anxieties and the nerve-wracking nature of that. I
thank them for keeping the faith" (Eaton, 2010b).
This statement, cast in moral and even religious language, suggests that the board
held, at least to an extent, to a notion of duty from the perspective of stakeholder
theory, and that a deontological rather than strictly utilitarian view led to the board's
decision to cast shareholder value to the side. Yet both anecdotal evidence from
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executives in other enterprises and the academic literature on corporate governance
and social responsibility (e.g. Barnea & Rubin, 2010; Hawkins, 2006; Lea, 2004)
have many examples of considerable scepticism of directors towards any notion of a
priori rights of stakeholders.
"Keeping the faith" involved another set of stakeholders, without whom the enterprise
would fail: the players, supported by owners who would take an approach seeking
the common good, the good of the fans. Broughton's interview continued:
"We have had an incredible team and they've all done a great job…. We
have owners now who understand about winning, are dedicated to
winning, have put the club on a sound financial footing, are willing to back
the club to get back to being one of the, preferably THE, top teams….
NESV bring the passion, the experience, the understanding of sport and
the passion of fans and the need to think about how the fans as
stakeholders fit into the whole thing. It is a business but it's not just a
business and they understand that the emotional side of the fans and
that's what sets them apart" (Eaton, 2010b).
"It's a business but not just a business": In this case, we see a determination by the
board in which stakeholder interests, in particular those of the fans but also those of
players, took priority over shareholder interests. In this way, the role of the board
emerges not as the monitor for shareholders but as a mediating hierarchy (Blair &
Stout, 1999) to settle competing claims. That is, however, only one part of the board's
calculus.
The ethics of shareholder value 16 WESTMINSTER WORKING PAPER SERIES IN BUSINESS AND MANAGEMENT, PAPER 11-3
The consequences of a decision in favour of the owners' interest would have
damaged, perhaps very badly, the business of the football club. The fact that a
perceived duty to fans coincided with one utilitarian judgement (strategic value) at
odds with another (shareholder value) gives the decision of the board greater
impetus to decide against the interest of the owners and against shareholder value.
What remained for the courts to decide were the narrow legal matters of property
rights and contract, not the moral principles that underpin the board's decision. In the
face of ambiguity, the board adopted a pragmatic approach, suggesting that
pragmatic decisions arise more easily when consequential and deontological
interpretations of what is right coincide, even if they coincide imperfectly. In this case,
one version of utility trumped another. In different circumstances, a different
interpretation might arise from the same set of considerations.
Conclusions
This case differs from the mainstream corporate governance literature in several
ways that may limit applicability of its conclusions. It involves a private company, not
a modern public corporation of the type described in the seminal works on corporate
governance and agency theory (Berle & Means, 1932/1991; Jensen & Meckling,
1976). Unlike other private companies, it is one unusually in the public eye. These
observations must, therefore, remain very tentative. To generalize would require
research that goes beyond an inquiry into one decision by one board of one company
operating under one country's law and regulation.
The picture that emerges is one of a contest between differing goods and rights that
illustrate the value and shortcomings of taking a strong view of stakeholder theory,
The ethics of shareholder value 17 WESTMINSTER WORKING PAPER SERIES IN BUSINESS AND MANAGEMENT, PAPER 11-3
with its roots in duty ethics, and those of shareholder theory, with its basis in a
narrow view of utility. This special case shows that appeals to shareholder value
involve appeal to a different special case, that of the public company with dispersed
shareholders, where that narrow view of utility often approximates the wider view of
the strategic value of the business.
In this case, deontological and utilitarian views differ on what is right; but when
aspects of those views approximate each other the door opens for a pragmatic
choice. In public companies these views are blurred by the uncertainties over
whether the concept of shareholder value pertains to current shareholders, future
shareholders or market participants as a whole. Those uncertainties give boards
latitude to justify decisions to themselves without having to choose between utility
and duty when rejecting at least a narrow definition of shareholder value. The
analysis suggests further that the term shareholder value can be used as a substitute
for strategic value when needed to resolve an ethical dilemma and used with a
different meaning when discussing specific decisions with special shareholders.
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